Some Public Policy Implications of an Aging Population

Havi Echenberg, James Gauthier, André Léonard

Issue | Canada’s aging population affects public policy in many areas, including public pensions, health care and caregiving.

Synopsis | By 2036, seniors will comprise about 25% of Canada’s population, and the growing aging population will place a financial burden on public pensions and health care, among other impacts. Existing federal programs address some of the financial effects on non-institutional caregivers.

Timing | An actuarial report on the Old Age Security program is expected in 2011; legislated changes to Canada Pension Plan rules will be implemented between 2011 and 2016.

A major population change that will impact Canada and its public policies in the years to come is its aging population – a trend resulting mostly from lower fertility rates and increases in life expectancy.

While seniors (people aged 65 and over) represented 8% of the population in 1971, this segment is expected to increase to 14% in 2011 and almost 25% by 2036, when senior women are expected to outnumber senior men by approximately 700,000, compared with 545,000 currently.

Among its impacts, this phenomenon is expected to place a financial burden on public pensions, health care and caregiving.

Public Pensions

The Old Age Security (OAS) pension and the Guaranteed Income Supplement (GIS) for low-income seniors are programs financed by federal government general revenues. In 2009, OAS cost $27.1 billion and GIS benefits, $7.7 billion.

Due to the aging population, OAS and GIS payments are expected to quadruple (or double, accounting for inflation) between 2009 and 2036. There have been pressures to improve these programs, as seniors tend to have lower incomes than working-age Canadians.

The earnings-related Canada Pension Plan (CPP) is financed by employee–employer (including self-employed) contributions and interest earned on the investment of that money. The combined employee–employer contribution rate, at 3.6% in 1986, increased to 9.9% from 2003 on, resulting in annual surpluses as of 2001. These surpluses, which are expected to continue until 2020, should make the CPP financially sustainable over the long term.

Between 2011 and 2016, legislated changes to the CPP will be implemented to increase program flexibility and provide incentives to remain longer in the workforce. For example, the penalty for starting to receive benefits at 60 (before the usual retirement age of 65) will increase from 30% to 36%, while the bonus for starting at 70 will increase from 30% to 42%. CPP recipients will be able to exclude longer periods of low earnings from the calculation of CPP benefits. These changes are expected to be financially neutral for the program.

Other challenges include financial preparedness for retirement and the cost of the federal public service pension plan. In the latter case, the government’s real cost (adjusted for inflation) is expected to increase by $700 million from 2009 to 2023. This is on top of a $20 billion increase for OAS and GIS.

Historical and Projected Provincial/Territorial Health Expenditures and CPP/OAS Expenditures (Including GIS and Administration Costs), as a Share of GDP

Sources: For health care data – Office of the Parliamentary Budget Officer, Fiscal Sustainability Report, 18 February 2010, and authors’ calculations; for CPP/OAS data – Office of the Superintendent of Financial Institutions, Actuarial Report on the Canada Pension Plan, 2010, and Actuarial Report on the Old Age Security Program, 2008.

Health Care

While seniors represent about 14% of the population, they consume nearly 44% of all annual provincial and territorial health care expenditures. Total spending on health care exceeded $191 billion in 2010. Two thirds was provided by provincial and territorial governments, including $25 billion in federal government support through the Canada Health Transfer.

Provincial and territorial government health care spending has grown faster than the economy, increasing from 5% of gross domestic product (GDP) in 1975 to 7% in 2010. With an aging population, this trend is projected to continue, with independent forecasts ranging between 9% and 12% of GDP by 2036.1

Most health care costs in Canada are covered through publicly funded universal health insurance plans, known to Canadians as “medicare.” Given the aging population, health care demands are expected to grow in areas where universal coverage is not always provided, such as pharmaceuticals, long-term care, home care and end-of-life care.

Governments’ abilities to address the future health care needs of an aging population will likely depend on factors such as economic growth, innovations in health care delivery that improve cost effectiveness, the health status of seniors, and trade-offs among coverage, taxation and debt-financing.2

Caregiving

Recent research reports that one in four employed Canadians care for an elderly
dependant. Of these, 75% are middle-aged women caring for a parent with chronic
health issues. Increased expenses and reduced work hours may create financial strains.

Two federal programs support informal and unpaid caregiving:

The Employment Insurance program provides Compassionate Care Benefits to eligible employees for up to six weeks to care for or support a gravely ill family member “with a significant risk of death.” Some self-employed individuals may also be eligible for these benefits.

An income tax deduction is available for one or more individuals who maintain a “dwelling” for a dependent family member born before 1945.

Proposals for improving support for caregivers have included extending compassionate leave provisions and duration, changing CPP provisions to protect retirement incomes for caregivers, and making the tax deduction refundable, and therefore helpful to lower-income caregivers.3

Further Reading

Duxbury, Linda, Christopher Higgins and Bonnie Schroeder. Balancing Paid Work and Caregiving Responsibilities: A Closer Look at Family Caregivers in Canada. Canadian Policy Research Networks, Ottawa, 2009.

Estimates and projections on health care spending have been obtained from the Canadian Institute for Health Information, National Health Expenditure Trends, 1975 to 2010, Ottawa, October 2010; and from the Office of the Parliamentary Budget Officer, Fiscal Sustainability Report, Ottawa, 18 February 2010. Other projection scenarios are available from David A. Dodge and Richard Dion, Chronic Healthcare Spending Disease: A Macro Diagnosis and Prognosis, C.D. Howe Institute Commentary: The Health Papers, No. 327, Toronto, April 2011; Christopher Ragan, “Two Policy Challenges Driven by Population Aging,” Policy Options, Vol. 31, October 2010, pp. 72–79; and Organisation for Economic Co-operation and Development, Projecting OECD Health and Long-Term Care Expenditures: What Are the Main Drivers?, Economics Department Working Paper 477, Paris, 2006.

These factors are likely to play a role in discussions among federal, provincial and territorial governments on the renewal of health care financing arrangements beyond fiscal year 2013–2014. See First Ministers’ Meeting on the Future of Health Care 2004, A 10-Year Plan to Strengthen Health Care, 16 September 2004.

More detailed information on caregiving benefits is available from Service Canada.